Australia’s low level of venture capital investment is often raised as a cause for concern, as in today’s article from Elizabeth Knight in the Age, Start ups starved of venture capital:

In Australia the venture capital sector is not starved but neither is it properly supported.

The two people operating out of their garage that need a couple of hundred thousand dollars to develop an app can find the money. However, getting another couple of million to commercialise it is tricky here.

This is absolutely true. I recall my former Treasury colleague Anthony Goldbloom struggled to find funding in Australia for his Kaggle website, which runs data mining competitions, including for major companies such as GE and Facebook. But he was much more successful when he went to the US, where he was able to raise $10 million.

In my view, it makes sense for talented entrepreneurs to go to the US, because that is where they’ll receive the most support – it’s where the existing venture capitalists who are highly experienced in nurturing start-ups are, and it is where there already exists an entire community of people with the ideas and skills to contribute to innovative start-ups. This is the point Dominic Regan and I made in our 2008 Treasury Economic Roundup paper, Venture Capital in Australia. We noted:

High-technology industries tend to be heavily concentrated in regional ‘clusters’. For example, there are highly successful ICT clusters in Silicon Valley and Boston and there is an aerospace cluster in Seattle. It is a firm’s nearness, both in terms of location and relationships, to entrepreneurs, industry experts, financial and accounting specialists, marketers, and related businesses that determine the success of the firm and the intensity of a high-technology cluster (O’Mara 2005). Clusters such as Silicon Valley constitute a complex economic ‘ecosystem’, with a vast array of specialised businesses in related industries.

Regions that already have high-technology clusters tend to be more productive and attract a highly skilled workforce. They are also more likely to attract and sustain a large venture capital sector because the factors that result in clustering also are likely to reduce the risk to investors and increase potential profits. In this way they maintain their competitive advantage while driving the technological frontier forward.

Combined with competitive pressures, the confluence of the innovator’s knowledge and the venture capitalist’s industry experience creates a ‘hothouse’ environment that drives rapid growth of start-up firms. While venture capital is seen as a risky business, it is the considerable expertise of the venture capitalists that reduces risks and creates successful firms with self supporting clusters.

High-technology industries tend to be global in outlook. It follows that high-technology clusters will attract ideas that originate in other regions or countries. Ideas generated by Australian entrepreneurs may be easier to fund and generate higher returns in the US, for example, because they can take advantage of the unique opportunities within clusters. However, Australian firms and consumers will ultimately benefit from the commercialisation of the ideas, irrespective of where they are developed, as Australians are typically early adopters of new technologies.

In undertaking its current review of industry assistance, the Queensland Competition Authority should be vigilant against arguments that the Government should promote high-tech clusters, which appear very difficult for governments to artificially create.